General Duty of Honesty Only Extends So Far

By Graeme McFarlane

In a resounding decision from the Alberta Court of Appeal, the Court rejected the lower court’s decision that had greatly expanded an employer’s obligations to its employees. The lower court had declared that employers were now subject to a common law duty of “reasonable exercise of discretionary contractual powers.” The Appeal Court found this not to be the case and leave to appeal to the Supreme Court of Canada was denied.

Termination Ends Long-Term Plans
The facts of the case involved a claim by a terminated employee for benefits under the employer’s long-term incentive plan (LTIP). That incentive plan contained very clear language that benefits would only be payable if the employee was actively employed regardless of whether that employee was receiving termination benefits or salary continuance. Further, any previous long-term incentive award would be cancelled if it had not vested at the time of termination—notwithstanding any separation benefit plan.

When the employee was terminated, he received a lump sum separation payment, but was not provided with any LTIP bonus on the basis that he was contractually ineligible to receive such an award. The employee sued, and his claim was primarily based on the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71 which imposed a common law “general duty of honesty in contractual performance.” The employee argued that this duty meant that he was entitled to receive the LTIP payments even though the contractual language clearly stated the opposite intention.

General Duty of Honesty Expanded
The trial judge agreed with the employee. She noted that the decision in Bhasin described a “general organizing principle of good faith performance of contracts” and that these good faith requirements “have been recognized in relation to [the] termination of employment contracts.”

However, she then went much further and expanded these duties to include “a common law duty which requires that discretionary powers granted under a contract must be exercised fairly and reasonably and not in a manner that is ‘capricious’ or ‘arbitrary’.” While this observation may not be that alarming, it provided a stepping stone to what the Court of Appeal ultimately overturned.

The trial judge then used the above statement to say that when an employer used its discretionary authority to terminate an employee on a without cause basis:

“where the termination deprives an employee of the right to receive earned performance bonuses, grants, or awards, then the exercise of the discretion to terminate without cause becomes arbitrary or capricious when the employer creates circumstances under which the employee would be unable to receive the bonuses or other benefits…”

Prior Promises and Good Faith
Based on this statement, she found that the company had breached this duty by depriving the employee of the unvested LTIP grants that were extinguished upon termination. The judge seemed to be saying that an employer cannot avoid its previous promises by utilizing its without cause termination power to extinguish bonus awards. As a result, the employee was awarded $444,205.

The employer took issue with what it argued was the judges expansion of the good faith comments set out in the Bashin case and filed an appeal. The court allowed the appeal and quashed the damages award.

‘Radical’ Extension of Law Quashed
Much of the judgement focused on the judge’s pronouncement that “discretionary powers granted under a contract must be exercised fairly and reasonably.” The court of appeal stated that duty described in Bashin is very narrow: “[it] requires only that the contracting parties will not lie to each other, knowingly mislead each other with respect to the performance of the contract, or act dishonestly.”

The court said further that such a “radical extension of the law is unsupported by authority, and contrary to the principles of the law of contract.” Such a principle, the court said, would create a situation where reverse engineering of the contract could occur. The Bashin principle is not to be used as a tool to rewrite contracts to conform to what a court may think is “fair.”

Good, Solid Contracts Enforced
The court also said that a decision to terminate employment without cause is not discretionary as that term is known at law. Rather, it is a contractual right which, in this case, was clearly set out. The various contractual documents were straightforward and clearly set out that unvested LTIP awards were not payable if the employee ceased working including any reasonable notice period. Accordingly, no damages were incurred as a result of the employee’s dismissal.

This case provides useful guidance when faced with a claim based on the Bashin decision. It affirms that it is not a court’s job to review the terms of a contract to ensure “fairness.” Any review under this doctrine is limited to the behaviour of the parties regarding the execution of the contract—and that conduct must be quite egregious to persuade a court to award damages. The message here is that good solid contracts will be enforced as long as you treat your employees honestly.

Graeme McFarlane is a partner at Roper Greyell LLP, a firm focussed on partnering with companies to find solutions to workplace legal issues.

(PeopleTalk Fall 2017)

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